Under Rajan, RBI to focus on currency; rupee to hit 69: Reuters poll

BANGALORE Mon Aug 26, 2013 7:08pm IST

1 of 3. Chief economic adviser Raghuram Rajan walks inside the finance ministry in New Delhi August 6, 2013.

Credit: Reuters/Adnan Abidi

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BANGALORE (Reuters) - Incoming Reserve Bank of India (RBI) Governor Raghuram Rajan will prioritise currency stability over inflation and growth, according to a Reuters poll which also showed the worst is not over for the rupee.

The rupee has lost around 15 percent to the dollar, hitting record lows almost daily, since the U.S. Federal Reserve hinted in May that it would soon begin paring back its massive economic stimulus programme, sparking an investor exodus from emerging markets seen as the most exposed to foreign funding.

Rajan, a widely acclaimed economist, takes over as governor of the RBI from incumbent Duvvuri Subbarao on September 5, at a time when the Indian economy is facing its worst crisis since 1990-1991.

Eleven of 17 economists polled by Reuters said the currency will be the top priority for Rajan but the consensus showed it will likely weaken to 69 per dollar before rising, implying a further 7 percent fall from Monday's spot rate of 64.10.

Most expected it to bottom out in September.

The Indian economy is caught in a quagmire of slow growth, high inflation, rickety government finances and a tumbling currency that is the among the worst performing in emerging markets.

"Rajan could streamline the RBI's focus to stabilising the currency and inflation while being supportive of growth," said Nizam Idris, head of FX strategy at Macquarie Bank in Singapore.

"The RBI must realise it cannot control the rupee, rates, capital flows and inflation all at the same time."

Most of the RBI's moves to break the currency's fall so far have not helped.

Since mid-July, it has tightened cash conditions which have failed to support the rupee, partly as Subbarao later said those measures were temporary.

Changing tack, it announced last week it would buy longer-dated bonds to lower borrowing costs, but that led markets to question the RBI's resolve in defending the currency.

Even Rajan's appointment earlier this month failed to calm markets and the rupee rallied for only a few hours after the announcement.

Analysts, however, said the RBI will likely make some important changes under the new regime.

While most expected greater focus on the currency and prices, a few economists said the RBI might begin targeting an inflation level while bringing the consumer price index into the realm of policy making.

RBI VS. NEW DELHI

With elections due in 2014, New Delhi's subsidy programme, most recently the food security bill, could blow a hole into the country's weak finances -- one of the biggest causes of the rupee's thrashing.

Policymakers are struggling with both trade and current account deficits.

Despite that and the clamour for easy monetary policy, the RBI will be expected to maintain its tough stance on inflation and check currency volatility.

Analysts also said under Rajan the RBI could be expected to improve its communication with markets.

"It's a difficult job, especially when the government lacks a majority in the parliament and due to the upcoming elections which can tie Rajan's hands," said Amy Yuan Zhuang, analyst at Nordea.

"The RBI should make efforts to increase transparency and communication in its policy making."

(Editing by Kim Coghill)

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